big picture

emerging markets brics
Sponsored By:

Emerging Markets – Are the BRICs More Powerful than America?

Emerging markets have been battered recently. And last year, all the BRICs significantly lagged behind the United States in terms of investing profits.

The BRICs — that is, Brazil, Russia India and China — stacked up quite poorly vs. the U.S. in 2013. Just look at these returns for emerging markets ETFs across last year:

  • U.S. up 30%, as measured by the SPDR S&P 500 ETF (SPY)
  • Brazil down 21%, as measured by the iShares MSCI Brazil ETF (EWZ)
  • Russia down 6%, as measured by the Market Vectors Russia ETF (RSX)
  • India down 5%, , as measured by the Aberdeen India Fund (IFN)
  • China down 7%, as measured by the iShares China Large-Cap ETF (FXI)

But the past is the past. What’s up with emerging markets and the BRICs in 2014?

Well, new World Bank Data indicates China’s economy could top America’s as early as this year — at least as measured by a newfangled metric known as “purchasing-power parity.” The World Bank measure is crafted in a way that determines what money can actually buy in different global economies, and how much real wealth the residents of each country command.

Of course, standard GDP measures still have the U.S. firmly in the lead — even despite the fact that recent growth numbers show America’s economy expanding at an anemic 0.1% rate in Q1 of this year. And it’s worth noting that that much of China’s might comes simply from its 1.3 billion residents vs. a population of around 315 million for the United States; on a GDP per-capita basis, China lags not just the U.S. considerably but almost all of the developed world.

But however you do the math, an important question for investors to consider is, “Which nation has a more powerful economy right now, and are emerging markets the best investment compared with a struggling U.S.?”

Add Emerging Markets and BRICs to Your Portfolio

Admittedly, some of the BRICs remain challenged in 2014. But not all of them.

While the emerging markets of Russia and China remain under pressure, India has bounced back nicely. The India Fund is up almost 10% and the EWZ Brazil ETF is up about 5% YTD vs. roughly 2% gains for the S&P 500 in the same period. In regards to INF, a closed-end fund, it’s also worth pointing out that the India Fund still trades for a roughly 10% discount to its net asset value to boot even after this run.

I remain convinced that there are big opportunities abroad, however, even in saber-rattling Russia or a cooling China. While the uncertainty between Vladimir Putin and the West is indeed an issue, it’s highly unlikely to devolve into World War III. And furthermore, the current problems in China are part of a narrative that have been playing out for years as the nation matures and attempts to move from a manufacturing economy to a service-driven one.

Big picture: Investing overseas should be part of any long-term investing portfolio because no single economy — America’s, China’s or anyone else’s — can remain the best investment without stumbling. That means you should always have some kind of foreign equity exposure as part of a diversified, long-term investment strategy.

Despite risk in emerging markets and the BRICs, I think investors can have confidence buying now … and continuing to buy for the long term.

Forget about horseracing GDP between the U.S. and emerging markets, and take the long view — that ultimately, diversified international investors are better off to see growth everywhere, regardless of who is #1 or #2.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

Get The Slant delivered to your inbox every day!

Comments